Wondering how to dissolve a nonprofit organization? The process is similar to dissolving other types of corporations and business entities.

Dissolving a Nonprofit Corporation

For many people, the process of dissolving a nonprofit organization is emotional and difficult. By taking certain steps, you can make the winding down process go more smoothly. One reason a nonprofit corporation might need to be dissolved is that it has fulfilled the mission set forth by the founders. It could be that challenges facing the organization are insurmountable, making it unsustainable. Or perhaps other organizations may be handling similar tasks and fulfilling the needs of the community, or you could be merging your nonprofit with another and dissolving yours as part of the process.

Breaking Down the Steps to Dissolve a Nonprofit Organization

Federal laws require tax-exempt nonprofit organizations to distribute any remaining assets to other tax-exempt organizations as part of the dissolution process. This rule is outlined in the IRS 990, Schedule N. In order to fulfill this requirement, you will need to identify other nonprofit organizations that could potentially accept your organization's assets as part of the process.

When transferring these assets to another nonprofit, you may need to fill out certain legal documents:

  • Trademark registrations
  • Contracts
  • Property deeds

Maintain an inventory of all assets held by the nonprofit to manage the transition more smoothly.

Board of Directors

Before you can begin the process of dissolution, the members of the organization's board of directors must vote in favor of the decision to dissolve. However, voting is not the only responsibility of the board. The board members will need to reach a consensus about the dissolution, as well as take an official vote that is recorded in the meeting minutes. This will help affirm that dissolving the nonprofit organization is the right decision.

Before taking the vote, the board members will often be presented with a plan to dissolve. However, in most cases, the board has been discussing the potential to dissolve the organization long before any plan is formally drafted, and the process continues after the vote has been taken to dissolve. After making the decision, the next step is to file all required paperwork with the state in which the organization is registered. This paperwork includes any required dissolution documents, as well as Form 990 (the final annual report) that must be filed with the IRS.

When drafting a plan of dissolution, make sure include a written outline and description of the plan for distributing any assets to other tax-exempt organizations, as well as addressing any outstanding liabilities. The articles of dissolution, also referred to as the certificate of dissolution, should be filed with the corporate registration agency in your state. Filing this document notifies the state of the plan to dissolve the organization.

It's important to review the requirements for dissolution in your state. For example, certain states require nonprofits to complete other steps before filing the plan of dissolution. In Michigan, a nonprofit must receive approval on its plan from the attorney general's office. In New York, nonprofit organizations must file petitions through the court system to dissolve.

Pay Any Liabilities

Any outstanding liabilities must be identified and handled. Make sure to include required taxes and any obligations outlined in contracts between other parties and the organization. The next step is coming up with a plan to terminate any recurring and/or future liabilities, as well as pay off existing debts. If the nonprofit is unable to pay off its debts and doesn't have enough assets to cover the outstanding liabilities, bankruptcy may be an option to pursue.

Create a list of the inventory of assets held by the nonprofit, and then determine which of those assets will be contributed, transferred, or sold. All sales and transfers must be clearly documented in the organization's records. Keep in mind that any asset transfers can only be provided to other organizations that are designated as tax-exempt public charities that hold the 501(c)(3) designation. Assets may also be transferred to local, tribal, state, or federal government agencies.

You must inform the IRS of the plan to dissolve by filing Form 990, as well as Form 990-T if it applies to your organization.

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